Thursday, September 27, 2012

Is Amazon Trying To Sell Organic Food?

Sometimes I think Amazon.com (Nasdaq: AMZN ) has taken its basic business model from the common cold. Companies, like the unsuspecting populace, think, "We'll be fine; Amazon's not even in our sector." Then, one cool fall day, the tissues come out, and by the end of the week, the competing company is balled up on the couch, watching ALF reruns. This week's infection has reached out and grabbed a hold of green retailers. Amazon has announced a new environmentally focused site called Vine, and the implications are worrying.

Vine is an offshoot of Quidsi, which Amazon purchased in 2010. The stated goal of the site is to be "an online shopping destination for natural, organic, and sustainably made products." That means everything from snacks to backpacks, making the site resemble a filtered-down version of Amazon. In addition to carrying such a broad range, Vine claims to do all the research and dirty work for customers, checking each product it carries against a set of criteria. This means customers should be able to shop without having to worry whether the products' claims to sustainability are genuine.

The model is similar to the one originally adopted by Whole Foods (NYSE: WFM ) , which is one of the reasons Whole Foods should be on guard. While the chain has had great success over the past few years, a great deal of that success can be attributed to its ability to bring fresh, wholesome food to new places. If Vine can provide the service it claims, that selling point may slowly fade into the background. On the other hand, Whole Foods is likely to maintain its ability to source locally, something that Amazon is unlikely to achieve.

Whole Foods investors don't need to get worried yet, though. This isn't the first time Whole Foods has faced competition for its core customer group, and it won't be the last. The Fresh Market (NYSE: TFM ) has been expanding slowly for years, and while it's still largely an East Coast chain, it has plans to open stores in California starting this year. So far, Whole Foods hasn't blinked in the face of the new competition.

Whole Foods has also fended off Wal-Mart (NYSE: WMT ) , so far. The retail giant is the largest grocer in the country, according to the USDA. For a few years, the company has had a push to sell more organic food. While the ride hasn't always been easy, it's been profitable. But Whole Foods has soldiered on, recently announcing plans to open a total of 1,000 stores. Given Wal-Mart's footprint, most of those 1,000 will have to overlap with the big boy.

Given Whole Foods' strong track record in dealing with the competition, I'm not too worried about Vine. Though I will be keeping an eye on non-grocery sales, to see if they start to slip. It seems unlikely that people will switch to ordering all their fresh food online -- though in Europe, this is trending -- but soaps, paper goods, and other non-perishable items could be an easy target. Whole Foods hasn't broken these categories out, historically, but a push from Amazon could put a squeeze on those "easy to order online" sorts of goods.

For now, I'm staying out of the whole fray. Both Amazon and Whole Foods are trading at pricey multiples, with a lot of things changing quickly for both companies. Whole Foods is going to see The Fresh Market in California for the first time, and Amazon is now dealing with the new video offering from Barnes & Noble that could hurt that revenue stream. - Andrew Marden, The Motley Fool